Weekly jobless claims fell by 5,000 to 381,000 compared to expectations of 375,000, while continuing claims fell by 76,000. Continuing claims for the June 7 were 3.060 million. This is the eighth consecutive week above the 3 million mark.
The 10 a.m. release of the Philadelphia Fed index will be crucial in gauging the weakness in a key manufacturing region for the month of June. The headline index is expected to have edged up to -10 from -15.6, showing a negative reading for the seventh-straight month, the longest sub-zero streak since the 13 consecutive months between December 2000 and 20001. Markets will scrutinize the new orders and employment indices, both of which improved in May but remained below zero at -3.7 and -1.0 respectively.
Also at 10 a.m. EST is the leading indicators index expected flat in May, following a 0.1% rise in April and March.
The dollar is off its lows of the European and Asian sessions but remains generally under pressure for the week in light of renewed downside risks to the U.S. economy, via
macroeconomic data;
gloomy earnings reports by bellwether companies such as Fedex;
and continued losses on the banking sector. The breadth of negative economic and market currents highlights the necessity for the Federal Reserve to maintain interest rates on hold, and the possible risk for renewed rate cuts later this year.
Recall, that while the Fed has toughened its inflation rhetoric, it has by no means upgraded its growth assessment. Indeed, the latest macroeconomic data and earnings reports have reminded bond and equity participants why the Fed’s stance on economic growth remains unchanged. Noting the Fed’s efforts to steer interest rate expectations into the direction of inflationary expectations, i.e., keeping rates unchanged into end of year and possibly a rate hike in early Q1, we remain skeptical whether equity markets will allow further increase in bond yields without a protracted selloff given the aforementioned negative currents.
Technically speaking, the S&P500 is nearing a trend pattern not seen since April 2001, which was the first third of the 2000-2002 recession/bear market. The chart illustrates that the 50-week moving average is a few points away from falling below the 100-week moving average, a pattern not seen since April 2001. The technical significance is underlined by the fact price repercussions of short-term moving averages falling below longer term averages, implying that the appreciable rate of deterioration in current price trends. The importance of the relationship is also substantiated by the fact that 100-50 week average crossover of April 2001 occurred when the S&P500 dropped 13% off its March 2000 high, while the current price point coincides with a 17% decline off the October record high.
Given the combination of the aforementioned fundamental and technical factors, we bolster our long held case for expecting two more rate cuts this year of 25 basis points each, prompting a 1.50% fed funds rate by end of 2008. This assessment stands despite the intensifying inflationary pressures, which have become a global phenomenon, but may be displaced in priority by the U.S. central bank in the event of resurfacing recessionary conditions.
Risk reduction is USD negative
The currency impact of the latest reduction in risk appetite has been largely dollar negative due to U.S.-driven nature of falling equities. The news from Fedex and Morgan Stanley as well as the week’s dismal economic data on U.S. housing and industrial production has pushed USD lower across the board. Notably, yesterday’s stock drop was accompanied by a rise in AUD/USD, which is unusual for a high yielding currency pair to strengthen during falling frisk appetite. The prolonged rebound in gold to 10-day highs is also reflective of pressure in the dollar.
The chart below shows the turnaround in USD/JPY following its failure too breach above the 200-day moving average (MA), which was briefly broken in the past few sessions, albeit, without any forceful continuation. We mentioned on Sunday that “The similarity between the lack of conviction amid U.S. stock indices and the USD/JPY pair suggests limited upside for the dollar. Upside remains limited at 108.45, with ample downside room towards 108.05 and 107.70.” Indeed, the pair has now broken below 107.60 to as low as 107.50. Today’s jobless claims decline of only 5,000 indicates the prolonged weakness in U.S. labor markets. Downside cleared the way for 107.60 and 107.30. Medium-term outlook stands at 106.50. Upside capped at 108.00, followed by 108.30.
I’m still overseas on business and responding to emails but having issues retrieving voice mail. Feel free to call if the need arises but please do not leave any phone messages until June 30th.
Ashraf Laidi
Chief FX Strategist
CMC Markets
a.laidi@cmcmarkets.com
